Planning for the Future

10/16/2015

While you're alive and have philanthropic goals, give appreciated assets held in a taxable account to charity. For charitable bequests, designate your IRA or tax-deferred employer retirement plan. Why? Suppose a hypothetical Al Cole wants to give $10,000 to charity this year. Instead of cash, he donates $10,000 of ABC Corp. stock that he bought for $2,000. As long as Cole's holding period is more than one year, he'll get a full $10,000 charitable tax deduction. Yet those shares might be worth only $8,000 to Cole after paying tax if he sold them himself. The retirement planning and estate planning benefits are big. Say Cole has $1 million of securities: $500,000 in a taxable account and $500,000 in a traditional IRA. Cole wants to leave $500,000 to charity and $500,000 to his son Bob, who is in a high income tax bracket. If Cole leaves the taxable account to charity, Bob will inherit the IRA. Bob will have to take distributions, which will be highly taxed on top of his other income. Instead, Cole can leave his $500,000 IRA to charity. The charity or charities can cash in the IRA bequest and owe no tax, as they are tax-exempt. Now Bob will inherit the $500,000 taxable account. He won't owe any income tax on money he withdraws. He also won't owe any capital gain if he happens to sell securities in the account right away, before they gain more value. That's because he gets a cost basis step-up to market value on those assets.

Investor's Business Daily's recent article, "How You Can Squeeze Tax Breaks From Charitable Giving," says that this maneuver works very nicely if the taxable account holds appreciated securities. A Partial Payout strategy applies whether you want to bequest all or just some of your IRA. Experts suggest that it's better to use your IRA for donations in your estate plan. But you have to decide how you want to do it.

Consider the following scenario as an example: Ida Bass has a $500,000 traditional IRA, and she wants to leave $50,000 to charity from that IRA. The rest of the IRA is to be split evenly between her two children (Many IRA beneficiary forms require percentage allocations for multiple beneficiaries). Another way to do it would be for Ida to just leave 10% of her IRA to charity. The IRA form could designate that each of her kids will inherit 45% of the amount in the account at her death. This would leave the dollar size of her charitable bequest indefinite—potentially leaving more to the charity if the IRA grows or less if its value decreases.

Whether you implement the fixed amount or the percentage approach, problems can arise. Those who will inherit the balance of the IRA need to ensure that the charity is paid in full before September 30th of the year after the death of the donor. If you do that, those getting the balance can stretch out required distributions of the IRA balance and extend their tax deferral. However, if you miss the September 30th deadline, the taxable distributions will be accelerated. So individual beneficiaries should be aware of what they need to do if a charity also is on the form.

One other idea is to split the IRA. Bass could transfer $50,000 from her $500,000 IRA to a new IRA account, so that her favorite charity would be the beneficiary of the new IRA. That way her children won't have to worry about the charity if they want to claim the maximum tax deferral from the IRA they inherit.

09/24/2015

Skilled estate planning is essential to the tax-efficient transfer of the family business across the generations. While the majority of family business owners have estate plans, the majority of these plans can be considered dated. Family businesses are responsible for more than 70% of global production and are one of the principal creators of private wealth. Often critical to the continuity of the family business and to the perpetuation – if not enhancement – of family wealth is estate planning.

Forbes’ article, “Most Family Business Owners Should Update Their Estate Plans” reports that an international survey of 336 middle-market family businesses found that more than 90% of family members who are senior executives with equity in the firms have estate plans. That’s the good news. Now the bad new: only 22% of these estate plans have been updated within the last two years. About a quarter of them have been updated between two and five years ago, and the rest—almost half—have not been reviewed in over five years.

Most estate plans become “old” after a few years. This means that situations change, such as family relationships, business matters, and their net worth—making it prudent to review and potentially refine their estate plans.

In addition to out-of-date estate plans, the quality of these plans must be questioned, as some family business owners don’t take advantage of strategies to reduce estate, gift, and other taxes. In some situations, there are ways to improve the financials of the business and provide economic benefits to the family at the same time.

09/22/2015

When young couples expect their first child, the to-do list never seems to end. From lining up in-home help to managing hectic daily schedules, the process can prove daunting. Then there's financial planning. Financial advisors often urge parents-to-be to prepare by budgeting for the future. They might need well over $250,000 to fund a child's upbringing until age 17. The best financial advisors also raise clients' awareness about the ultimate grim question: What would happen to your child if you die?

Young couples are advised to see an estate planning attorney in “When Couples Have Their First Baby, Advisors Deliver,” from Investor's Business Daily. The estate-planning attorney will help them address guardianship issues, draft a living will, and other related matters. Some people are reluctant to meet with an attorney. But ask yourself, "Do you want your in-laws to raise your child?" That question should make you want to designate a preferred guardian.

Life insurance and long-term disability coverage become very important. Some folks believe they are covered because they have disability insurance at work. This may not be enough.

09/18/2015

Estate planning doesn’t concern itself only with financial savings or your home. It can also include your property and land. And in no other industry is land more valuable than farming. By building and implementing an airtight estate plan, farmers and ranchers can ensure a smooth transition of land ownership and management when the time comes. An estate plan can provide for the needs of all family members, even those who aren’t actively engaged in its daily functions. It also can help mitigate the risk of high inheritance taxes on land that is made more valuable by inflation. And because land is not a liquid asset, an estate plan is important in stemming and addressing any potential settlement problems.

In “Planning for Farmland,” the Black Hills Pioneer reports that a quarter of the nation’s agricultural land is likely to change hands in the next decade, according to the USDA Natural Resources Conservation Service. That land needs to remain productive and valuable. This important objective can be achieved with an effective estate plan. The NRCS says that a sound estate plan can help accomplish at least four goals:

Transfer ownership and management of the agricultural operation, land, and other assets to a new operator;

The American Farmland Trust (AFT), an organization operating under the NRCS, serves agricultural landowners, concerned citizens, planners, local officials, state agency staff, land trusts and policymakers. The AFT answers complex questions on all types of issues.

09/11/2015

"Mistitling of assets is one of the prominent causes of failed estate plans," asserts Avani Ramnani, CFP®, director of financial planning and wealth management at Francis Financial, a wealth management firm in New York. What might go wrong? As an example, Daniel Timins, CFP®, an estate planning attorney in New York, says that one critical aspect of titling that has led to a "shocking number of legal disputes" is whether an account is titled joint tenants with right of survivorship (JTWROS) or a mere "convenience account."

The website financialplanning.com recently posted “Titling Mistakes Can Disrupt Estate Plans,” which discusses the situation where an elderly parent may title a bank account as JTWROS with an adult child who can help with paying bills if the parent is unable to handle his or her own affairs. When the parent passes away, the balance in that account will go to that child. If the parent was thinking of giving the surplus to all other children, this will not take place with a JTWROS account.

A convenience account is strictly for situations where one owner wants another person to have access to funds to pay bills, such as with an elderly parent. Many states allow these convenience accounts that let someone use the funds for the original owner's benefit, but the convenience signer doesn't own the account.

Convenience accounts do not pass to the other owner at death. The account can lead either to a future probate of the account or the convenience owner walking off with the funds because he thinks he deserves them.

Creating a JTWROS account to help an elderly person may lead to family issues. It isn’t uncommon to see an adult child assisting his or her parents with their finances as they get older, but families need to exercise caution when they consider retitling accounts.

As an example, one daughter wanted to be put on all of her mother's accounts. This would’ve created a potential issue at the time of passing. Even worse, it could precipitate theft or misappropriation of the funds. The family should use a power of attorney instead. A power of attorney ceases at death, so the family would have to file with the court to get to any open accounts after death.

09/08/2015

Natural disasters happen! Catastrophes! Accidents! Illness! No one gets out of this world alive, but we can plan to make it easier on those we leave behind. If you have accumulated assets or have minor children, you need to do some estate planning. The more complicated your life, the more complicated your planning needs to be.

Experts say that less than 35% of us have wills, according to a CBS Boston post titled “Where There’s A Will There’s A Way!” It’s a common subject about which people procrastinate—particularly those with young children. Parents are focused on keeping their children safe day-to-day, but they rarely engage in any estate planning to keep the kids safe in the event that something should happen to them. At a minimum, you need a will naming guardians for your children if something should happen to you and your spouse. Without a will, you will leave this to be handled by whoever the court appoints. Plus, if there is life insurance involved, relatives will come out of the woodwork and offer to take the kids.

One solution is to create a trust for the children when they are minors so something is in place for their financial support in the event you pass away. You would need to designate a person or persons in the will to serve as trustee. However, many parents delay this because they can’t figure out who to designate as guardian for their children. This decision can be complicated with blended families. So many just postpone thinking about this important decision.

The wisest selection to make is an adult sibling, cousin or a friend who lives close by. You should discuss this with family members and friends. Talk about who you would like to raise your kids.

09/07/2015

Self-employed people need to save for retirement, and a tax-advantaged retirement plan is the best way to accomplish this. Designed for the self-employed, the Simplified Employee Pension (SEP-IRA) and the Solo 401(k) are relatively easy to set up. Both plans offer tax-deductible contributions, enabling you to cut your taxes and get tax-deferred growth. Another plus: you can still reduce your 2014 federal income taxes because either plan allows you to contribute up until your tax-filing deadline, including the six-month extension. If you got an extension and haven’t filed your return yet, you have until Oct. 15 to make 2014 contributions to your plan. However, while a SEP-IRA can still be established up until Oct. 15, those who wish to make a profit-sharing contribution to a Solo 401(k) must have established the plan by Dec. 31, 2014.

An SEP-IRA is similar to a traditional IRA in that the investment earnings grow taxed-deferred until they are withdrawn. However, a self-employed individual can save and deduct much more than the $5,500 ($6,500 if 50 and over) for contributions to a traditional IRA. SEP-IRA contribution limits are calculated as the lesser of 20% of net business income or $52,000 for 2014, $53,000 for 2015.

A Solo 401(k) is for self-employed individuals with no employees. Your spouse is not included in the employee count and is permitted to contribute to the plan if he or she is employed by the business. This 401k can be structured as a traditional 401(k) or as a Solo Roth. The maximum 2015 contribution is $53,000 or $59,000 for those 50 and older. The contribution includes (i) an annual employee deferral up to 100% of compensation or earned income for a self-employed individual (to a maximum of $18,000 and $24,000 if 50 or older), which allows some to contribute more to a Solo 401(k) than to a SEP-IRA; and (ii) an employer discretionary contribution of up to 25% of compensation as defined by the plan or 20% of earned income for a self-employed individual.

One advantage a 401(k) offers over an IRA is that you can borrow from a 401(k). If you opt for Solo Roth 401(k), there’s no deduction, but withdrawals are tax-free if you wait until you’re 59½. The plan lets you save much more than a Roth IRA. Another advantage for the Solo Roth 401(k) is that contributions aren’t subject to income limits (unlike the Roth IRA).

Which is better… a Roth or traditional IRA? It depends on many factors. If you expect to be in a higher tax bracket in the future, the Roth version may make more sense, but if your current tax rate is low, it might be better to forgo a deduction now in order to withdraw money tax-free when you’re in a higher bracket in the future. What’s nice is that it doesn’t have to be an “either-or” proposition: you can have both traditional and Roth 401(k) plans and divide contributions between them.

For most self-employed individuals, the SEP-IRA may be a better choice than a traditional IRA because the contribution limits are much higher. Also, deductions for traditional IRA contributions are limited by income for participants who are covered or whose spouse is covered by a retirement plan at work.

As an planning attorney, I can help you see how these IRA options may fit into your strategy. I also work with a handful of superb financial advisors who we can bring in for a team approach to your planning if you do not have your own financial advisor. Your financial planner or mine, I am on your team.

08/31/2015

When it comes to managing and growing your wealth, it pays to have a deep bench. Who’s on your money team? Among Millionaire investors who work with a team of advisors, one-third consider a team of two advisors to be ideal, while 36 percent prefer to work with a team of three. Of those who consider a money team of two to be ideal, the highest percentage (41 percent) are Millionaire Baby Boomers ages 45-54. Of those who consider three advisors to be the optimum money team, the highest percentage (56 percent) are Gen Xers ages 36-44. Ultra High Net Worth households with a net worth between $5 million and $25 million are most likely to field a money team of at least three advisors. Nearly four-in-ten (39 percent) consider a team of three to be ideal. Among these investors, the age groups most likely to agree are those under 50 (50 percent) and seniors over the age of 65 (40 percent). Who do you want on your money team? You can’t tell the players without a scorecard. The website Workable Wealth identified several key players and the positions they play.

CERTIFIED FINANCIAL PLANNER™ Practitioner. Along with your estate planning attorney, this player is responsible for helping you paint the “big picture.” This perspective allows you to identify your financial goals and prepare for a financially secure retirement. This will include money management, investing advice, estate planning, insurance planning, business planning, and other strategies to help you get ready for retirement and the ability to enjoy your senior years in comfort.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements. (I can attest that the test to qualify as a CFP® was as difficult as the Bar exam!)

Accountant. An accountant or an attorney experienced with tax matters is also an essential player on your team. It’s good to have an accountant or lawyer who will prepare your taxes and offer appropriate tax shelter recommendations.

Insurance Broker. This person will help navigate the wide range of available products and determine which best suits the needs of you and your family. If they team with your estate planning attorney, you can be sure that all of your objectives are met and that everything works towards the common goal of placing you in the best position when you retire.

Estate Planning Attorney. This is the “pivotal” money team member. This is your clean-up batter or your quarterback. The attorney is crucial and will assist you with the creation of your estate plan. He or she will help you draft essential estate planning documents like a will, living trust, a health care directive and a power of attorney. Your quarterback will make sure that your assets are protected and your estate is settled according to your wishes.

08/28/2015

A Naperville businessman was sentenced recently to seven years in federal prison and ordered to pay more than $3.3 million in restitution for conning clients into investing in nonexistent Turkish bonds as part of an elaborate, $28 million Ponzi scheme, authorities said. John T. Burns III was an owner and operator of USA Retirement Management Services, according to a release from the office of Zachary T. Fardon, U.S. Attorney for the Northern District of Illinois. The release said Burns persuaded a dozen clients to invest more than $3.3 million in Turkish bonds "on the promise of lucrative returns." He told the investors – many of them retirees – "that he had substantial experience investing money on behalf of clients; that he and his parents were personally invested in the bonds; and that the profitable returns in those investments were providing financial security to him and his family," the release read in part.

A jury convicted Burns of wire fraud and mail fraud for his part of a larger Ponzi scheme, which bilked $28 million out of 120 people. Burns identified potential investors through seminars that promoted his presentation and offered a free meal to attendees. He then followed up with prospective clients and pitched what he claimed was a uniquely profitable investment opportunity in Turkish bonds. But Burns didn't tell them that the Turkish bonds didn't exist. Their investments were used to pay other investors in the scheme.

USA Retirement Management was ordered out of business in 2010 by the U.S. Securities and Exchange Commission. With no prior experience in estate planning or handling investments for clients, Burns held himself out as an experienced, certified estate planner to scam his clients.